Aviation Finance Report 2015

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AVIATION FINANCE REPORT 2015

U.S. economy. With that tightening of The rising dollar and declining aircraft residual values the labor market, more competition for workers should translate to rising are proving to be a drag on the industry’s recovery wages, which would further stimulate the U.S. economy.” www.ainonline.com by Curt Epstein Despite the brightening economic picture in the U.S., for many the With the economic downturn now bellwethers such as the stock mar- wounds from the downturn inspire seven years in the rear-view mirror, the ket indexes reached record levels in caution in the decision-making pro- U.S. economy has continued its slow but late May, when the Dow Jones Indus- cesses. In this economic expansion, steady recovery this year, reaching, in trial Average hit 18,312 and the S&P notes Wayne Starling, senior vice pres- the eyes of most of the world, an envi- 500 peaked at 2,131. Likewise, unem- ident and national sales manager for able streak of 22 consecutive quarters of ployment has dropped from a high of PNC Aviation Finance, “companies expansion. But the strengthening of the 10 percent in October 2009 to nearly and individuals have retained more U.S. dollar has placed a chill on the inter- half that now. “We continue to reduce cash, deferred capital expenditures and national business jet market, which is still the slack in the labor market that has deferred investment in plant, property dealing with the effects of declining air- persisted since the great recession,” and equipment” to a greater extent than craft residual values. noted Gus Faucher, senior economist in previous recoveries. Through the first half of the year, at the PNC Financial Services Group. However, “that fear is fading and will the U.S. gross domestic product rose “I think by the spring we should be continue to fade as we get farther and 3.9 percent, a substantial jump from 1.2 back to full employment [defined as 5 farther away from the great recession,”

percent the previous year. Economic percent or less unemployment] in the Faucher told AIN. “The conditions for © 2015 AIN Publications. All Rights Reserved. For Reprints go to AVIATION FINANCE REPORT 2015

concern to both buyers and lenders. “For aircraft leases closed at the peak New/Pre-owned Business Jet Full Retail Sale Transactions U.S. FAA Financial Documents, Financed vs. Cash* of the market in 2006 to 2008, asset values have eroded sharply, forcing banks 100% to ‘mark to market’ aircraft residuals, 90% contributing to embedded losses,” said 80% Michael Amalfitano, Stonebriar’s executive vice president and senior manag- 70% ing director of business aviation, and 60% the former head of Bank of America’s 50% corporate aircraft portfolio. 40% “Our traditional wisdom used to say 30% that these airplanes lost three percent of 20% their value a year, but that’s not the real-

10% START OF ECONOMIC MELTDOWN ity any more,” said Jay Mesinger, CEO 0 of Colo.-based J. Mesinger Corporate 8 0 ’ ‘1 2 ‘1 3 ‘1 3 ‘1 4 ‘1 4 ‘1 5 ‘0 1 ‘1 2 ‘0 5 ‘0 8 ‘0 0 ‘0 0 ‘0 1 ‘0 5 ‘0 6 ‘0 6 ‘0 7 ‘0 7 ‘0 9 ‘0 9 ‘1 0 ‘1 0 ‘1 1 ‘1 1 ‘0 2 ‘0 2 ‘0 3 ‘0 3 ‘0 4 ‘0 4

Jet Sales. “A consensus of smart indus- 4 2 4 2 4 2 2 4 2 4 2 4 2 4 2 2 4 2 4 2 4 2 4 2 4 2 4 4 2 2 4 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q try people today would say that it will lose

Analysis by AvData 10 percent the day you fly it off the lot Data based on the 4 quarter total moving average. FINANCED *CASH *FAA registries without debt instruments or lease are presumed to be cash. and for the next four to five years it will lose seven percent a year.” Beyond that he business capital spending overall remain not recovered to pre-downturn lev- believes the value will drop by 5 percent pretty good. We have low borrowing els. “While I often hear that new lend- each year thereafter. costs, and banks are becoming more ers have entered the market, I think the Those dwindling residual values have willing to extend credit.” In the Federal reality may be that lenders who pulled played a role in operators’ holding onto Reserve Bank’s July survey of senior loan back in the [financial] crisis are re-enter- aircraft longer. According to industry officers on bank lending practices, more ing,” said Ford von Weise, director and data provider JetNet’s IQ Survey of oper- than 45 percent of the large U.S. bank head of Citi Private Bank’s global air- ators, the average length of time a buyer respondents reported they had some- craft finance division. of a new business jet will keep the airplane what eased the spread of loan rates over While new regulations are forcing has risen to more than five years today the bank’s cost of funds for large and the large banks to focus more sharply from 3.7 years in 2005. For purchasers of middle-market companies [those with on borrowers’ credit, von Weise said used jets the average term of ownership annual sales of $50 million or more]. Of “we are seeing more competition in this has grown to 3.2 years from 2.1 years. those that had eased terms for lending, end of the market through pressure on more than 95 percent indicated that more spreads, loan-to-values and other deal Cash Up Front, Finance Later aggressive competition from other banks terms.” As some lenders, such as GE Roughly 74 percent of all private jet pur- or nonbank lenders was at least some- Capital (see article on facing page), have chases in the U.S. were paid for with cash, what important in that decision. left the market, others have entered, according to an analysis of documents www.ainonline.com “The jet finance and leasing space such as Global Jet Capital and Stone- filed with the FAA through the first three is more fragmented now,” said Joseph briar Commercial Finance. quarters of the year by JetNet’s AvData DiLallo, head of corporate aviation For many of the traditional lend- division. Strict interpretation of the filings finance and leasing at BMO Harris ers, the effects of the downturn and shows that number has remained relatively Equipment Finance. “Until just a few the resulting declines in aircraft val- consistent over the years. Many attribute years ago, two major financiers dom- ues are still evident in their portfolios. companies’ and wealthy individuals’ pref- inated the leasing market in the U.S.; A 10-year financing deal signed at the erence for spending cash to a lack of suit- today that same space is shared more peak of the superheated market period able investment opportunities. Stronger evenly by a half-dozen or so active les- of 2007-2008, when the OEMs deliv- economic growth “would provide buy- sors.” With the recent increase in U.S. ered nearly 2,500 new bizjets and air- ers with proven alternatives for deploy- corporate flight activity, smaller play- craft values reached an apex, will be ing cash in their business,” noted Michael ers such as local and regional banks staining the books for at least another Kahmann, managing director and group have once again joined the major lend- year or two, and the declining resid- head CIT Business Aircraft Finance. ers, though some in the industry lament ual aircraft values, likely nowhere near “Therefore, we think the ‘cash is king’ that the number of lenders and the where they were predicted to be when phenomenon is closely linked to a lack of level of competition for loans still has the deal was signed, are an enduring good investment alternatives.” © 2015 AIN Publications. All Rights Reserved. For Reprints go to AVIATION FINANCEREPORT

Billings (billions) Annual New Jet Shipments/Pre-owned Jets Available $11 $13 $15 $17 $19 $21 $23 $25 1,000 1,500 2,000 2,500 3,000 $1 $3 $5 $7 $9 500 Note: Plotlinesshowtotal end-of-yearbillings. Source: GAMA, 2014 General Aviation Outlook StatisticalDatabookandIndustry $14.35 $13.16 *The totalnumberofjetsshippedbytheend3Q/15was464. Intheﬁrstninemonthsof2014, itwas459. fortheyear.Notes: businessjetsareaverages numbersforpre-owned Inventory Newjetshipments areend-of-yeartotals. Sources: BusinessJets);GAMA(NewJetsShipped);Honeywell(2014forecast) ofPreowned JetNet(Inventory 2005 200620072008 2009 2010 201120122013 $1.19 Total forjetsandturbopropscombined Inventory of Pre-owned BusinessJets ofPre-owned Inventory Annual NewBusinessAircraft BillingsWorldwide 1,673 05 0620 0820 0021 02 2013 2014 2015 2012 2010 2011 2009 2007 2008 2006 2005 750 Compared withAnnualNewBusinessJetShipments Annual Average InventoriesofPre-owned Jets (in billionsofdollars,2005-2014) 1,661 $21.95 $23.89 $1.95 1,315 (2005-2015) 3,025 $18.00 $1.30 $19.3 Billings forjets New BusinessJetsShipped 2,268 $17.24 696 $18.6 $1.37 2,588 672 $18.45 $17.11 $1.34 2,460 Billingsforturboprops 2015 678 $22.87 $21.05 $1.82 2,332 722 $23.84 $22.02 2014 $1.82 710-725 2,281 years ago almosteveryone we were age Charlie Bravo Aviation. “Five Texas-based aircraftCEO of broker financing,” saidRené Banglesdorf, used aircraft inthesurvey. number edgeddown to55percent for source for buying new aircraft. That financing istheirpreferred funding worldwide, 58percent indicated that ness aircraft owners and operators vey, which polledmore than550busi - cost,” hesaid. this assetthat isat significantly lower when you canborrow moneytofinance that meetsorexceeds market returns, toward using your capital to get a return you are highly likely andhighly biased are anultra-high-net-worth individual, you are runningabusiness,ion. “If oryou try veteran Shawn Vick holdsthat opin- Jet Capital executive director andindus- cent, thanks to low interest rates. Global financed aircraft tobeashigh85per this happens.” bank; there isnotransparency when is tapping theircredit lineat thelocal ing cash,what theyare actually doing someonepay- “Often when we hearof Source Bank’s specialtyfinancegroup. 1st advisor andpresident emeritusof feel rushed,” saidAllenQualey, senior financing at their leisure so they don’t see somepeoplepaying cashandthen they believe tobeagooddeal.“We to expedite the buying process on what many buyers have electedtousecash usedaircraft tumbled, as pricesof aircraft values.” future and gives themarealistic view of close toresidual values andassetdecay, age, thefinancingprocess keeps clients ciating assetslike aircraft. Byusinglever appreciating assets, useleverage for depre- “As Ioftentellpeople, use your cashfor marine financewithFirstRepublic Bank. son, managing director for aviation and may notbeking,” saidJames Simp- the statistics for cashtransactions. “Cash post-purchase financing that would skew those aircraft buyers soughtandreceived “More people thanever before are In thethird-quarter JetNet IQsur Others believe theproportion of thedownturn, In theaftermath of What isunknown ishow many of

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© 2015 AIN Publications. All Rights Reserved. For Reprints go to www.ainonline.com AVIATION FINANCEREPORT wants ashorter, medium-dated deal mining customerfunding.“Everybody thekey criteriaindeter remains oneof to shorterterms.” weak aircraft portfolios, which have led capital, lowments, margins and costof pressured by regulatory capital require- years,” AmalfitanotoldAIN.“Banksare have reduced greatly, typically tofive from“Loan terms theregulated banks are makingtheirmark onloanstructures. and anti-moneylaunderingregulations on page 30),andknow-your-customer keep more reserves onhand(seesidebar strengthening banksby requiring themto nomic policies such as Basel III, aimed at 10 years ormore, recently enactedeco- While someare stilloffering of terms what was commonjustafew years ago. shortenedmarkedlyloan terms from banking standpoint.” lion, theriskisn’t nearly ashighfrom a 10-year-old airplanethat is only $2 mil- you are lookingat a told AIN.“Butif years withdepreciation,” Banglesdorf based onwhat’s happened inthelast10 on a$75millionairplane, I’d benervous and Iwere lookingat a$65millionloan Iwere abank ers received financing.“If million orless, andallbut three buy- businesssmall tomidsize jetsworth $5 pany hasclosed16dealsthisyear on selling towas paying cash.” Hercom- Among lenders, creditworthiness Long-time aircraft buyers have seen Source:

Percent of Aircraft Financed 100% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0 %

Amstat 2005 / CIT % ofJe June 2006 2015

t Air 2007 cr a ft 2008

Fin anced b 2009 - y Manu Banglesdorf notedthat mosttraditional Banglesdorf aircraft they will consider for financing. sweet spotwhen itcomestotheage of 8X andG650.” what’sof comingorisbeingdelivered–the 7X andG550are underpressure because will bereplaced,” saidGates. “TheFalcon “It’s negatively impactingtheaircraft that somemodels. ing declineinthevalues of ment modelsisalsofuelingthecontinu- already crowded marketplace.” fabulous newflow jets into today’s of gladly oblige. Theresult isarelentless and greener, andthejetmanufacturers newer, nicer, bigger, faster, farther, safer to 25 years, but today’s jet buyers want years ago everyone describedoldas20 in many respects,” saidDiLallo. “Ten consider a15-year-old jettobeold ness aviation today, including myself, change inmindset. “Most folks inbusi- have contributed toanindustry-wide depreciation, the persistentissueof at GlobalJet Capital. Robert Gates, seniormanaging director lower-tier credit underserved,” noted ger-dated deals, themediumand themarket, which leavesof thelon- credit, causingafood fightinthat part with areally strong investment-grade 2010 Lenders have theirown particular derivativeThat inflow andreplace of - Those constraints, coupledwith f 2011 actur ed Y What isOld? 2012 ear -USA 2013 2015 2014 19 19 1990 20 20 70 80 0 10 s s s s s bank a voluntaryregulatory frameworkfor ing SupervisiondevelopedBaselIII, crisis, theBaselCommitteeonBank- up thecostofmoney.” result isthat thisregulation willpush specialty financegroup. “Thenet ident emeritusof1stSource Bank’s Allen Qualey, senioradvisorandpres- non-bank lenders/lessors,” noted rarily benefitothers,particularly the banks themost,whichwill tempo- decreased overallloanprofitability.” reserves required underBaselIIIhave other comparableloans,andthe loans carrylongertermsthanmany terms longer than five years. Aircraft longer profitable forustooffer loan finance atCitiPrivateBank.“Itisno director andheadofglobalaircraft our business,”saidFord vonWeise, loans andleasesforaircraft.” “This willresult inhigher-priced bank with Stonebriar Commercial Finance. managing director ofbusinessaviation executive vicepresident andsenior ucts,” explained Michael Amalfitano, collateral risksacross theircredit prod- banks toaddress lossgivendefaultand impacts thecostofcapitalasitrequires bank’s revenue falls.“Thisadversely not earnincomebybeingloaned,the because thatheld-backcapitalcan- tal inreserve againsttheirloans,and are nowrequired toholdmore capi- transparency and disclosures. SIFIs and governancestrengthen banks’ also aimstoimprove riskmanagement pose tothefinancialsystem.BaselIII to reflect therisktheirfailure would must beabletoabsorbhigherlosses, important financialinstitutions(SIFIs) of theagreement isthatsystemically is underway. Oneofthemaintenets the BankforInternationalSettlements, 60 different federalreserves through mentation of the accords, ratified by resilient tostress andsurprises.Imple- to makeworldwidebankingmore ing andmarketliquidity In response tothe2008economic “Basel IIIwillimpactthelargest “Basel IIIhashadmajorimpactson capital adequacy ADD SOMEBASEL TO THERECIPE –C.E. , risk intended stress test-

© 2015 AIN Publications. All Rights Reserved. For Reprints go to www.ainonline.com AVIATION FINANCEREPORT aircraft it comes in the form of covering aircraft itcomesintheform of craft,” explained Amalfitano. “For new ents must have invested equityinanair they want it. “Todayfinancing if cli - top-tier credit canstillfind100-percent ing onthecustomer’s credit. Thosewith theaircraft value,30 percent depend- of payments currently ranging from 10to put some “skin in the game,” with down downtime considerations.because of those that don’t,” offered Mesinger, requirements willbe worth more than nots, andthosethat already meetthe are goingtobecomehaves andhave ble candidates for upgrades. “Aircraft critical eye even onaircraft that are via- Weise. Lenderswillnodoubtcasta older GIVs and the like,”of noted von may furtheraccelerate theretirement upgrading theseaircraft economics of to compliancedeadlines. “Thepoor decisions as the calendars move closer clearly play alarger role infinancing ADS-B.” Thoseloomingmandates will cally upgraded for thingslike Fans and or notithasbeen,canbe, economi- a maintenanceprogram, andwhether tion, whether ornotanaircraft ison condi- mann. “There are questionsof age,”a functionof saidCIT’s Kah - will decrease, but old is not strictly gets old, our comfort with the asset approach. “Certainly asanaircraft ers take amore circumspect adhoc established guidelines, while oth- outside thispreference.” they havehighly valued a need clients if added, “We dotrytoaccommodate our Fargo EquipmentFinance. However, he manager for corporate aircraft withWells ard Ramsden, vicepresident andterritory that are 10years oldornewer,” saidRich- financing,” shesaid. ing toeducate thebanksabout aircraft a broker standpointbecausewe’re hav- their localbank.That’s interesting from financing anolderaircraft are turningto out othersources. “People interested in 10 years old,leadingcustomerstoseek older aircraft, those15orinsomecases financiers are stillshying away from Lenders are stillexpecting buyers to For somelendersthoseare strictly “Ourfocus continues tobeonaircraft - to Vincent: “Ifyoutookaloanineuros on sellers anadded arbitragebonus,according est is.” The exchangerateisgiving European activity is;it’s whereallthecustomerinter place rightnow:theU.S. That’s whereallthe heading west.“They’regoing toonlyone the skies”byEuropean-based businessjets ber. As aresult,hehasseen a“darkeningof dollar inMarchanddroppedagainOcto- buy abusinessjet. strong dollarmakesitlesslikelytheywill cent ofEuropeanrespondentsreportedthe which Vincent createdanddirects,37per Rolland Vincent. percent justbyexchangerates,notedanalyst ing Europe,arestaringatcostsdrivenup20 ple intheseweakercurrencyareas,includ- in U.S.dollars,suchasbusinessjets.Peo- cating tradeinglobalcommoditiespriced ance hasstrengthenedthedollar, compli- doing significantlybetter.” That imbal- among developedeconomiestheU.S.is “Globally we have slow growth, and then reverse today,” asserted PNC’s Faucher. true in thiseraofglobalization. “It’s the world catchesacold”maynolongerhold the market.” with certainty, animportantshiftin having drivenof asmartdealand overseas is starting to give way to pride phenomenon that we’ve beenseeing something. Thepride-of-ownership on value oronhow longittakes tosell don’t want to deal with surprises, either with aknown cost,” saidGates. “They aviation asatoolthat, ideally, comes value tothelessor. “Theyview business residual they shift the uncertainty of a more palatable optionfor someinthat pre-owned market, leasesare becoming the residual values andthevagaries of the leaseinvestment.” credit to protect rity deposit or letter of asecu- might require cashintheform of advance onaloan.Even aircraft leases down payment tosecure thecollateral tract; for pre-owned aircraft it is the cash the liquidated damages inanOEMcon- The exchange rate fell to €1.04 to the The exchangeratefellto€1.04the In thelatestquarterlyJetNetIQsurvey, The old adage“iftheU.S. sneezes, the Given theuncertaintiessurrounding An International Snapshot 2015 - - or slightly down,” heconcluded. demand for business jetsisbasically flat ance oneanother, meaningthat overall two factorsprobably counter-bal - ing witharesurgent U.S. market. “The Kahmann, contrasting theirrecent cool- the industrysincecrisis,” notedCIT’s been thedriving factorfor recovery in “The emerging markets certainly have deals.there for theshrinkingnumber of Americacontinue tocompete Bank of ers suchasCIT, Global Jet Capital and are “notinexpensive,” andgloballend- ers, but according toBartoktheirrates vide financingfor Chinesecustom- Minsheng andICBCcontinue topro- market. Indigenouslenderssuchas travagance regulations have cooled that downturn, government-imposed anti-ex- the ers would leadtheindustryoutof business jetsthere. also playedaroleinstiflingdemandfor Finance. The slumpingenergy markethas Kirsten Bartok,managingpartnerof Air of theirwealthisbasedthere,”explained impossible to finance them because most they areinRussia,butit’s stillalmost satellite countries,sotheydon’t looklike ing to recreate themselves in the nation’s has allbutclosedthere.“Russiansaretry- Ukraine, andthetaponaviationfinancing tions imposedforitsinvolvementin nomic difficulties broughtaboutbysanc- many ofthoseplaces.Russiafaceseco- vation, butachillhassincespreadacross try turnedtotheemerging marketsasitssal- newer aircraft,”said Amalfitano. low-value olderaircrafttobuyahigh-value international client to get out of an existing aircraft values, it is quite difficult for an pled withthecontinual decline in used and Asia andlowercurrencyvalues,cou- omies inEurope,theMiddle East, Africa well. “Giventhecurrently depressed econ- themselves felt in therestofworldas the businessaviation industry aremaking Europe andmovingtotheU.S.” ceeds makessense,soairplanesareleaving AIN. “To payoff aloanwithU.S.dollarpro- euro loangotcheapallofasudden,”hetold the airplaneandyouboughtitindollars,that While theOEMshopedChinesebuy- In thedepthsofrecessionindus- The surging dollar and itseffects on o -

© 2015 AIN Publications. All Rights Reserved. For Reprints go to www.ainonline.com AVIATION FINANCEREPORT to theindustry, which hadseen the market cameaslittle shock sion’s pendingdeparture from financing worldwide, yet thedivi- industry, providing aircraft largest funding sources inthe the eventually becameoneof folio duringtheearly 1980s. It arena sinceitestablished itsport- in the corporate aircraft finance press release. acceptable returns,” GEnotedina increasingly difficult togenerate panies haschanged,makingit wholesale-funded financialcom- all consumerlendingentities. mercial financeandleasing, conglomerate’s real estate, com- finance division, alongwiththe block was itscorporate aircraft ontheauction arm–included its commercial aircraft finance Capital Aviation Services(Gecas), care EquipmentFinanceandGE Energy FinancialServices, Health- core industrialbusinesses–such as divisions that relate directly toits on toseveral “vertical” financing company.” While itintendstohold create “a simpler, more valuable facturing roots and in the process intended toreturn ittoitsmanu- itslendingbusinesses, amoveof pany stated itwould divest most corporate direction. Thecom- announced amajorchangeinits through itsGECapital division, ness aviation financecommunity tric, long a stalwart in the busi- Epstein Curt by Global Jet Capitalstepsin GE Capitalexits market, GE Capital hadbeenaforce “The business modelfor large, On April 10General Elec- establish itasamajorplayer in the deal,which willimmediately business,” Vick said. tions where we shouldbe doing with goodcredit andinjurisdic- almost any “high-qualityairplanes the scope is broadening to include the GECapital portfolio inhand larger, longer-range jets, but with the focus hadbeensquarely on ital’s executive director. Initially, said Shawn Vick, Global Jet Cap- tions suchasthisonewithGE,” organically and through acquisi - ily inexpanding thebusiness both dictions. “We are investing heav- juris- registered inanumber of some 350 aircraft ownership of The process involves transferring ada, Mexico andSouth America. portfolio, which includesCan- icas $2.5billioncorporate aircraft had acquired GECapital’s Amer ing high-endbusiness aircraft, startup that infinanc- specializes that GlobalJet Capital, arecent seen over theyears.” formalizes what we hadalready the announcementtoday; itjust are seeingany negative impactto several years. “SoIdon’t thinkwe national business over thepast tually stoppedcourtinginter adding that thecompany hadvir AirFinance, managing partnerof to pullback,” saidKirstenBartok, downturn. theeconomic in theaftermath of the company becomelessactive Global Jet Capital expects On October5thenews broke “After 2008iswhen GEstarted 2015

- - - growing again.” just managing aportfolio; now it’s ert Gates. “For years theywere senior managing director Rob- “Thisisanew dawn,”firm. said GE Capital staffers who joinedthe plement the16experienced former continues toacquire talenttosup- said Vick. tunities present themselves,” oppor thosekindsof scale if looking togeteven greater folios is undiminished and we’re appetite toacquire otherport- make anotherbigsplash.“Our the company stands ready to the business onedealat atime, new transactions.” we cangooutthere andfinance that’s abilliondollarswithwhich powder.’ What that really meansis to inthebankingindustryas‘dry “Sometimes you hear itreferred house facility,” Vick toldAIN. aware- about abilliondollarsof together togetthisdealincludes acquisition financingthat came the international markets. “The former business, especially in Capital planstorevitalize GE’s with GE. anagreement was struck basis of lios, andwithinafew monthsthe theiraircraft portfo- sible saleof various institutionsabout thepos- agement begandiscussionswith after thelaunch,company man- age acombined$500billion.Soon Industrial Partners, which man- ners, TheCarlyle Group andAE GSOCapitalment firms: Part- with $2billionfrom three invest- launched ayear ago at NBAA2014 closed by year-end. The company stages, withtwo orthree tranches the market, tobecompletedin In the meantime, the company While itisprepared tobuild With the purchase, Global Jet o -